UNITED STATES

                  SECURITIES AND EXCHANGE COMMISSION

                       Washington,  D.C.  20549

                               FORM 10Q

[X]  Quarterly Report Pursuant to Section 13 or 15(d) of the
     Securities Exchange Act of 1934 for the quarterly period ended
     September 30, 2006

                                  OR

[  ] Transition Report Pursuant to Section 13 or 15(d) of the
     Securities Exchange Act of 1934 for the transition period from
     _________ to _________


                   Commission File Number: 2-88927


                      FIRST KEYSTONE CORPORATION
        (Exact name of registrant as specified in its charter)


                Pennsylvania                           23-2249083
        (State or other jurisdiction of             (I.R.S. Employer
       incorporation or organization)              identification No.)


   111 West Front Street, Berwick, PA                     18603
(Address of principal executive offices)               (Zip Code)


 Registrant's telephone number, including area code:  (570) 752-3671


Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.

                      Yes  [X]        No  [  ]

Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See
definition of "accelerated filer and large accelerated filer" in
Rule 12b-2 of the Exchange Act).  (Check one):

                     Large accelerated filer [  ]
                        Accelerated Filer  [X]
                    Non-accelerated filer  [  ]

Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).

                        Yes [  ]        No [X]


On November 1, 2006 there were 4,323,746 shares of the Registrant's
common stock outstanding.


<PAGE>

<TABLE>

                      PART I. - FINANCIAL INFORMATION

Item. 1  Financial Statements

                 FIRST KEYSTONE CORPORATION AND SUBSIDIARY
                        CONSOLIDATED BALANCE SHEETS

<CAPTION>

(Amounts in thousands)
                                                  September       December
                                                     2006          2005
                                                 (Unaudited)

                                           <c>             <c>
ASSETS
Cash and due from banks                            $  6,737        $  7,098
Interest bearing deposits in
   other banks                                           83              58
Investment securities, available-
   for-sale securities carried at
   estimated fair value                             236,428         247,288
Investment securities, held-to-
   maturity securities, estimated
   fair value of $6,906 and 4,217                     6,932           4,248
Loans, net of unearned income                       251,257         234,593
Allowance for loan losses                            (3,622)         (3,676)
                                                   ________        ________
   Net loans                                       $247,635        $230,917
                                                   ________        ________
Premises and equipment-net                            4,909           5,091
Accrued interest receivable                           3,002           2,604
Cash surrender value of bank
   owned life insurance                              11,817          11,470
Goodwill                                              1,224           1,224
Other assets                                          2,898           2,401
                                                   ________        ________
   TOTAL ASSETS                                    $521,665        $512,399
                                                   ========        ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
   Non-interest bearing                            $ 38,844        $ 39,664
   Interest bearing                                 347,526         323,132
                                                   ________        ________
      TOTAL DEPOSITS                               $386,370        $362,796
Short-term borrowings                                18,511          28,151
Long-term borrowings                                 60,535          65,535
Accrued interest and other expenses                   2,653           2,372
Other liabilities                                       116             102
                                                   ________        ________
      TOTAL LIABILITIES                            $468,185        $458,956

STOCKHOLDERS' EQUITY
Common stock, par value $2 per share               $  9,079        $  9,079
Surplus                                              12,322          12,387
Retained earnings                                    37,365          35,714
Accumulated other comprehensive income                  371             807
Less treasury stock at cost 215,827
   shares in 2006 and
   153,624 in 2005                                   (5,657)         (4,544)
                                                   ________        ________
   TOTAL STOCKHOLDERS' EQUITY                      $ 53,480        $ 53,443
                                                   ________        ________
   TOTAL LIABILITIES AND
      STOCKHOLDERS' EQUITY                         $521,665        $512,399
                                                   ========        ========

See Accompanying Notes to Consolidated Financial Statements

</TABLE>

                                1

<PAGE>

<TABLE>

                 FIRST KEYSTONE CORPORATION AND SUBSIDIARY
                     CONSOLIDATED STATEMENTS OF INCOME
          FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
                                (Unaudited)

<CAPTION>

(Amounts in thousands except per share data)

                                                  2006            2005

                                            <c>             <c>
INTEREST INCOME
Interest and fees on loans                           $4,223          $3,746
Interest and dividend income
   on securities                                      3,012           2,887
Deposits in banks                                         1               4
                                                     ______          ______
   TOTAL INTEREST INCOME                             $7,236          $6,637
                                                     ______          ______
INTEREST EXPENSE
Deposits                                             $2,951          $2,080
Short-term borrowings                                   250             164
Long-term borrowings                                    709             737
                                                     ______          ______
   TOTAL INTEREST EXPENSE                            $3,910          $2,981
                                                     ______          ______
   Net interest income                               $3,326          $3,656
Provision for loan losses                               100             150
                                                     ______          ______
   NET INTEREST INCOME AFTER
      PROVISION FOR LOAN LOSSES                      $3,226          $3,506
                                                     ______          ______
NON-INTEREST INCOME
Trust department                                     $  122          $  106
Service charges and fees                                537             552
Bank owned life insurance income                        121             109
Gain on sale of loans                                    10              14
Investment securities gains
   (losses) - net                                        74              89
Other                                                    88              45
                                                     ______          ______
   TOTAL NON-INTEREST INCOME                         $  952          $  915
                                                     ______          ______
NON-INTEREST EXPENSES
Salaries and employee benefits                       $1,279          $1,144
Occupancy, net                                          154             152
Furniture and equipment                                 187             148
Professional services                                   115              99
State shares tax                                        131             121
Other                                                   514             581
                                                     ______          ______
   TOTAL NON-INTEREST EXPENSES                       $2,380          $2,245
                                                     ______          ______
Income before income taxes                           $1,798          $2,176
Income tax expense                                      295             372
                                                     ______          ______
Net Income                                           $1,503          $1,804
                                                     ======          ======
PER SHARE DATA
   Basic                                             $  .35          $  .41
   Diluted                                              .35             .41
   Cash dividends per share                             .22             .20


See Accompanying Notes to Consolidated Financial Statements

</TABLE>

                                   2

<PAGE>

<TABLE>

                 FIRST KEYSTONE CORPORATION AND SUBSIDIARY
                     CONSOLIDATED STATEMENTS OF INCOME
           FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
                                (Unaudited)

<CAPTION>

(Amounts in thousands except per share data)

                                                 2006              2005

                                           <c>             <c>
INTEREST INCOME
Interest and fees on loans                         $12,171         $10,985
Interest and dividend income
   on securities                                     8,968           8,537
Deposits in banks                                        6              44
Interest on federal funds sold                           0               3
                                                   _______         _______
   TOTAL INTEREST INCOME                           $21,145         $19,569
                                                   _______         _______
INTEREST EXPENSE
Deposits                                           $ 8,028         $ 5,804
Short-term borrowings                                  684             324
Long-term borrowings                                 2,167           2,265
                                                   _______         _______
   TOTAL INTEREST EXPENSE                          $10,879         $ 8,393
                                                   _______         _______
   Net interest income                             $10,266         $11,176
Provision for loan losses                              400             500
                                                   _______         _______
   NET INTEREST INCOME AFTER
      PROVISION FOR LOAN LOSSES                    $ 9,866         $10,676
                                                   _______         _______
NON-INTEREST INCOME
Trust department                                   $   385         $   358
Service charges and fees                             1,538           1,502
Bank owned life insurance income                       347             324
Gain on sale of loans                                   13              54
Investment securities gains
   (losses) - net                                      269             232
Other                                                  168             164
                                                   _______         _______
   TOTAL NON-INTEREST INCOME                       $ 2,720         $ 2,634
                                                   _______         _______
NON-INTEREST EXPENSE
Salaries and employee benefits                     $ 3,955         $ 3,669
Occupancy, net                                         452             431
Furniture and equipment                                561             499
Professional services                                  298             300
State shares tax                                       389             360
Other                                                1,580           1,706
                                                   _______         _______
   TOTAL NON-INTEREST EXPENSES                     $ 7,235         $ 6,965
                                                   _______         _______
Income before income taxes                         $ 5,351         $ 6,345
Income tax expense                                     823           1,089
                                                   _______         _______
Net Income                                         $ 4,528         $ 5,256
                                                   =======         =======
PER SHARE DATA
   Basic                                           $  1.04         $  1.20
   Diluted                                            1.04            1.19
   Cash Dividends                                      .66             .60


See Accompanying Notes to Consolidated Financial Statements

</TABLE>

                                   3

<PAGE>

<TABLE>

                 FIRST KEYSTONE CORPORATION AND SUBSIDIARY
                   CONSOLIDATED STATEMENTS OF CASH FLOWS
           FOR THE NINE MONTHS ENDED September 30, 2006 AND 2005
                                (Unaudited)

<CAPTION>

(Amounts in thousands)

                                                  2006            2005

                                           <c>              <c>
OPERATING ACTIVITIES
Net income                                         $  4,528         $   5,256
Adjustments to reconcile net income
   to net cash provided
   by operating activities:
   Provision for loan losses                            400               500
   Stock option expense                                   8                 0
   Provision for depreciation and
      amortization                                      404               409
   Premium amortization on investment
      securities                                        125               318
   Accretion of core deposit net
      discount                                            1               (65)
   Discount accretion on investment
      securities                                       (379)             (522)
   Gain on sale of mortgage loans                       (13)              (54)
   Proceeds from sale of mortgage loans               5,658             3,930
   Originations of mortgage loans
      for resale                                     (3,713)           (4,512)
   (Gain) loss on sale of foreclosed
      real estate                                        13                 0
   (Gain) loss on sales of investment
      securities                                       (269)             (232)
   Deferred income tax (benefit)                       (216)               (6)
   (Increase) decrease in interest
      receivable and other assets                      (609)              664
   Increase in cash surrender value
      of bank owned life insurance                     (347)             (324)
   Increase (decrease) in interest
      payable, accrued expenses and
      other liabilities                                 216               210
                                                   ________         _________
   Net Cash Provided by Operating
      Activities                                   $  5,807         $   5,572
                                                   ________         _________
INVESTING ACTIVITIES
   Purchases of investment
      securities available-for-sale                $ 52,266         $(105,676)
   Purchase of investment
      securities held-to-maturity                    (2,005)                0
   Proceeds from sales of investment
      securities available-for-sale                 (64,345)           71,423
   Proceeds from sales of investment
      securities held to maturity                       201                 0
   Proceeds from maturities and
      redemptions of investment
      securities available-for-sale                  21,790            29,858
   Proceeds from maturities and
      redemption of investment
      securities held-to-maturity                       107               104
   Net (increase) decrease in loans                 (19,078)            1,486
   Purchase of premises and equipment                  (147)              (97)
   Proceeds from sale of foreclosed
      assets                                            198                 0
                                                   ________         _________
   Net Cash Used by Investing
      Activities                                   $(11,013)        $  (2,902)
                                                   ________         _________
FINANCING ACTIVITIES
   Net increase (decrease) in
      deposits                                     $ 23,574         $  17,657
   Net increase (decrease) in
      short-term borrowings                          (9,640)           (3,022)
   Net increase (decrease) in
      long-term borrowings                           (5,000)           (1,375)
   Acquisition of treasury stock                     (1,255)             (112)
   Proceeds from sale of treasury
      stock                                              69                95
   Cash dividends                                    (2,877)           (2,637)
                                                   ________         _________
   Net Cash Provided by Financing
      Activities                                   $  4,871         $  10,606
                                                   ________         _________
   Increase (Decrease) in Cash and
      Cash Equivalents                                 (335)           13,276
Cash and Cash Equivalents,
   Beginning                                          7,156             6,186
                                                   ________         _________
Cash and Cash Equivalents,
   Ending                                          $  6,821         $  19,462
                                                   ========         =========

SUPPLEMENTAL DISCLOSURE OF CASH
   FLOW INFORMATION
   Cash paid during period for:
      Interest                                     $ 10,890         $   8,233
      Income Taxes                                    1,065               556


See Accompanying Notes to Consolidated Financial Statements

</TABLE>

                                   4


<PAGE>

                      FIRST KEYSTONE CORPORATION
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          September 30, 2006
                             (Unaudited)

NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     The accounting policies of First Keystone Corporation and
Subsidiary (the "Corporation") are in accordance with accounting
principles generally accepted in the United States of America and
conform to common practices within the banking industry. The more
significant policies follow:

PRINCIPLES OF CONSOLIDATION

     The consolidated financial statements include the accounts of
First Keystone Corporation and its wholly owned Subsidiary, The
First National Bank of Berwick (the "Bank"). All significant inter
company balances and transactions have been eliminated in
consolidation.

NATURE OF OPERATIONS

     The Corporation, headquartered in Berwick, Pennsylvania,
provides a full range of banking, trust and related services through
its wholly owned Bank subsidiary and is subject to competition from
other financial institutions in connection with these services. The
Bank serves a customer base which includes individuals, businesses,
public and institutional customers primarily located in the
Northeast Region of Pennsylvania. The Bank has 10 full service
offices and 12 ATMs located in Columbia, Luzerne and Montour
Counties. The Corporation and its subsidiary must also adhere to
certain federal banking laws and regulations and are subject to
periodic examinations made by various federal agencies.

SEGMENT REPORTING

     The Corporation's banking subsidiary acts as an independent
community financial services provider, and offers traditional
banking and related financial services to individual, business and
government customers. Through its branch and automated teller
machine network, the Bank offers a full array of commercial and
retail financial services, including the taking of time, savings and
demand deposits; the making of commercial, consumer and mortgage
loans; and the providing of other financial services. The Bank also
performs personal, corporate, pension and fiduciary services through
its Trust Department.

     Management does not separately allocate expenses, including the
cost of funding loan demand, between the commercial, retail, trust
and mortgage banking operations of the Corporation. Currently,
management measures the performance and allocates the resources of
First Keystone Corporation as a single segment.

USE OF ESTIMATES

     The preparation of these consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America, requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of these consolidated financial statements and the reported
amounts of income and expenses during the reporting periods. Actual
results could differ from those estimates.


                                5


<PAGE>


INVESTMENT SECURITIES

     The Corporation classifies its investment securities as either
"Held to Maturity" or "Available for Sale" at the time of purchase.
Debt securities are classified as Held to Maturity when the
Corporation has the ability and positive intent to hold the
securities to maturity. Investment securities Held to Maturity are
carried at cost adjusted for amortization of premium and accretion
of discount to maturity.

     Debt securities not classified as Held to Maturity and equity
securities are included in the Available for Sale category and are
carried at fair value. The amount of any unrealized gain or loss,
net of the effect of deferred income taxes, is reported as other
comprehensive income (loss) (See Note 6).  Management's decision to
sell Available for Sale securities is based on changes in economic
conditions controlling the sources and applications of funds, terms,
availability of and yield of alternative investments, interest rate
risk and the need for liquidity.

     The cost of debt securities classified as Held to Maturity or
Available for Sale is adjusted for amortization of premiums and
accretion of discounts to expected maturity. Such amortization and
accretion, as well as interest and dividends is included in interest
income from investments. Realized gains and losses are included in
net investment securities gains and losses.

     The cost of investment securities sold, redeemed or matured is
based on the specific identification method.

LOANS

     Loans are stated at their outstanding unpaid principal
balances, net of deferred fees or costs, unearned income and the
allowance for loan losses. Interest on installment loans is
recognized as income over the term of each loan, generally, by the
actuarial method. Interest on all other loans is primarily
recognized based upon the principal amount outstanding on an actual
day basis. Loan origination fees and certain direct loan origination
costs have been deferred with the net amount amortized using the
interest method over the contractual life of the related loans as an
interest yield adjustment.

     Mortgage loans held for resale are carried at the lower of cost
or market on an aggregate basis. These loans are sold without
recourse to the Corporation.

Past-Due Loans - Generally, a loan is considered to be past due when
scheduled loan payments are in arrears 15 days or more. Delinquent
notices are generated automatically when a loan is 15 days past due,
depending on the type of loan. Collection efforts continue on loans
past due beyond 60 days that have not been satisfied, when it is
believed that some chance exists for improvement in the status of
the loan. Past due loans are continually evaluated with the
determination for charge off being made when no reasonable chance
remains that the status of the loan can be improved.

Non-Accrual Loans - Generally, a loan is classified as non-accrual
and the accrual of interest on such a loan is discontinued when the
contractual payment of principal or interest has become 90 days past
due or management has serious doubts about further collectibility of
principal or interest, even though the loan currently is performing.
A loan may remain on accrual status if it is in the process of
collection and is either guaranteed or well secured. When a loan is
placed on non-accrual status, unpaid interest credited to income in
the current year is reversed and unpaid interest accrued in prior
years is charged against the allowance for loan losses. Certain non
accrual loans may continue to perform, that is, payments are still
being received. Generally, the payments are applied to principal.
These loans remain under constant scrutiny and if performance
continues, interest income may be recorded on a cash basis based on
management's judgement as to collectibility of principal.

Allowance for Loan Losses - The allowance for loan losses is
established through provisions for loan losses charged against
income. Loans deemed to be uncollectible are charged against the
allowance for loan losses and subsequent recoveries, if any, are
credited to the allowance.


                                6


<PAGE>


     A principal factor in estimating the allowance for loan losses
is the measurement of impaired loans. A loan is considered impaired
when, based on current information and events, it is probable that
the Corporation will be unable to collect all amounts due according
to the contractual terms of the loan agreement. Under current
accounting standards, the allowance for loan losses related to
impaired loans is based on discounted cash flows using the effective
interest rate of the loan or the fair value of the collateral for
certain collateral dependent loans.

     The allowance for loan losses is maintained at a level
estimated by management to be adequate to absorb potential loan
losses. Management's periodic evaluation of the adequacy of the
allowance for loan losses is based on the Corporation's past loan
loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay
(including the timing of future payments), the estimated value of
any underlying collateral, composition of the loan portfolio,
current economic conditions, and other relevant factors. This
evaluation is inherently subjective as it requires material
estimates including the amounts and timing of future cash flows
expected to be received on impaired loans that may be susceptible to
significant change.

DERIVATIVES

     The Bank has outstanding loan commitments that relate to the
origination of mortgage loans that will be held for resale.
Pursuant to Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities"
as amended by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities" and the guidance
contained within the Derivatives Implementation Group Statement 133
Implementation Issue No. C 13, the Bank has accounted for such loan
commitments as derivative instruments.  The outstanding loan
commitments in this category did not give rise to any losses for the
nine-month period ended September 30, 2006 and the year ended
December 31, 2005, as the fair market value of each outstanding loan
commitment exceeded the Bank's cost basis in each outstanding loan
commitment.

PREMISES AND EQUIPMENT

     Premises, improvements and equipment are stated at cost less
accumulated depreciation computed principally on the straight-line
method over the estimated useful lives of the assets. Long-lived
assets are reviewed for impairment whenever events or changes in
business circumstances indicate that the carrying value may not be
recovered.  Maintenance and minor repairs are charged to operations
as incurred. The cost and accumulated depreciation of the premises
and equipment retired or sold are eliminated from the property
accounts at the time of retirement or sale, and the resulting gain
or loss is reflected in current operations.

MORTGAGE SERVICING RIGHTS

     The Corporation originates and sells real estate loans to
investors in the secondary mortgage market. After the sale, the
Corporation may retain the right to service these loans. When
originated mortgage loans are sold and servicing is retained, a
servicing asset is capitalized based on relative fair value at the
date of sale. Servicing assets are amortized as an offset to other
fees in proportion to, and over the period of, estimated net
servicing income. The unamortized cost is included in other assets
in the accompanying consolidated balance sheet. The servicing rights
are periodically evaluated for impairment based on their relative
fair value.

FORECLOSED REAL ESTATE

     Real estate properties acquired through, or in lieu of, loan
foreclosure are held for sale and are initially recorded at fair
value on the date of foreclosure establishing a new cost basis.
After foreclosure, valuations are periodically performed by
management and the real estate is carried at the lower of carrying
amount or fair value less cost to sell and is included in other
assets. Revenues derived from and costs to maintain the assets and
subsequent gains and losses on sales are included in other non
         interest income and expense.


                                7


<PAGE>


BANK OWNED LIFE INSURANCE

     The Corporation invests in Bank Owned Life Insurance (BOLI)
with split dollar life provisions.  Purchase of BOLI provides life
insurance coverage on certain employees with the Corporation being
owner and beneficiary of the policies.

INVESTMENTS IN REAL ESTATE VENTURES

     The Bank is a limited partner in  real estate ventures that own
and operate affordable residential low income housing apartment
buildings for elderly residents. The investments are accounted for
under the effective yield method under the Emerging Issues Task
Force (EITF) 94-1, "Accounting for Tax Benefits Resulting from
Investments in Affordable Housing Projects". Under the effective
yield method, the Bank recognizes tax credits as they are allocated
and amortizes the initial cost of the investment to provide a
constant effective yield over the period that the tax credits are
allocated to the Bank.  Under this method, the tax credits
allocated, net of any amortization of the investment in the limited
partnerships, are recognized in the consolidated statements of
income as a component of income tax expense.  The amount of tax
credits allocated to the Bank were $128,000 in 2006 and $128,000 in
2005.  The amortization of the investments in the limited
partnerships were $75,000 and  $72,000 for the nine months ended
September 30, 2006 and 2005, respectively.  The carrying value of
the investments as of September 30, 2006 and December 31, 2005, was
$620,000 and $695,000, respectively, and is carried in other assets
in the accompanying consolidated balance sheets.

INCOME TAXES

     The provision for income taxes is based on the results of
operations, adjusted primarily for tax-exempt income. Certain items
of income and expense are reported in different periods for
financial reporting and tax return purposes. Deferred tax assets and
liabilities are determined based on the differences between the
consolidated financial statement and income tax bases of assets and
liabilities measured by using the enacted tax rates and laws
expected to be in effect when the timing differences are expected to
reverse. Deferred tax expense or benefit is based on the difference
between deferred tax asset or liability from period to period.

GOODWILL, OTHER INTANGIBLE ASSETS, AND PREMIUM DISCOUNT

     Goodwill resulted from the acquisition of certain fixed and
operating assets acquired and deposit liabilities assumed of the
branch of another financial institution in Danville, Pennsylvania,
in January 2004.  Such goodwill represents the excess cost of the
acquired assets relative to the assets fair value at the date of
acquisition.  The Corporation accounts for goodwill pursuant to the
Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Intangible Assets".  SFAS No. 142 includes
requirements to test goodwill for impairments rather than to
amortize goodwill.  The Corporation has tested the goodwill included
in its consolidated balance sheet at December 31, 2005, and has
determined there was no impairment as of that date.

     Intangible assets are comprised of core deposit intangibles and
premium discount (negative premium) on acquired certificates of
deposit acquired in January 2004 when the Bank assumed deposit
accounts of the branch of another financial institution.  The core
deposit intangible is being amortized over the average life of the
deposits acquired as determined by an independent third party.
Premium discount (negative premium) on acquired certificates of
deposit resulted from the valuation of certificate of deposit
accounts by an independent third party which were part of the
deposit accounts assumed of the branch by another financial
institution.  The book value of certificates of deposit acquired was
greater than their fair value at the date of acquisition which
resulted in a negative premium due to higher cost of the
certificates of deposit compared to the cost of similar term
financing.


                                8


<PAGE>


STOCK BASED COMPENSATION

     The Corporation had accounted for stock options and shares
issued under the Stock Option Incentive Plan through December 31,
2002 in accordance with Accounting Principles Board Opinion (APB)
No. 25, "Accounting for Stock Issued to Employees".  Under this
method no compensation expense is recognized for stock options when
the exercise price equals the fair value of the options at the grant
date. Under provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock Based Compensation",
the fair value of a stock option is required to be recognized as
compensation expense over the service period (generally the vesting
period). As permitted under SFAS No. 123 the Corporation had elected
to continue to account for its stock option plan in accordance with
APB No. 25.

     As of the first quarter 2003, the Corporation adopted Statement
of Financial Accounting Standards (SFAS) No. 148, "Accounting for
Stock Based Compensation - Transition and Disclosures - an amendment
of FASB Statement No. 123". The Corporation elected to use the
"prospective method" of accounting for stock options as allowed by
the Standard. Accordingly, compensation expense for the nine month
period ended September 30, 2006 in the amount of $8,000 is
attributed to the vested portion of stock options granted in 2005.

PER SHARE DATA

     Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share", requires dual presentation of basic and fully
diluted earnings per share. Basic earnings per share is calculated
by dividing net income by the weighted average number of shares of
common stock outstanding at the end of each period. Diluted earnings
per share is calculated by increasing the denominator for the
assumed conversion of all potentially dilutive securities. The
Corporation's dilutive securities are limited to stock options.

CASH FLOW INFORMATION

     For purposes of reporting consolidated cash flows, cash and
cash equivalents include cash on hand and due from other banks and
interest bearing deposits in other banks. The Corporation considers
cash classified as interest bearing deposits with other banks as a
cash equivalent since they are represented by cash accounts
essentially on a demand basis.

TRUST ASSETS AND INCOME

     Property held by the Corporation in a fiduciary or agency
capacity for its customers is not included in the accompanying
consolidated financial statements since such items are not assets of
the Corporation. Trust Department income is generally  recognized on
a cash basis and is not materially different than if it were
reported on an accrual basis.

RECENT ACCOUNTING PRONOUNCEMENTS

     In November 2005, the Financial Accounting Standards Board
(FASB) issued FASB Staff Position (FSP) 115 - "The Meaning of Other
Than Temporary Impairment and Its Application to Certain
Investments". This FSP provides additional guidance on when an
investment in a debt or equity security should be considered
impaired and when that impairment should be considered other than
temporary and recognized as a loss in the consolidated statement of
income. Specifically, this guidance clarifies that an investor
should recognize an impairment loss no later than when an impairment
is deemed other than temporary, even if the decision to sell has not
been made. The FSP also requires certain disclosures about
unrealized losses that have not been recognized as other than
temporary impairments. The Corporation has followed the guidance of
this FSP in 2005 and 2006.


                                9


<PAGE>


     In May 2005, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 154, "Accounting Charges and Error
Corrections", which modifies the accounting for and reporting of a
change in an accounting principle. This statement applies to all
voluntary changes in accounting principles and changes required by
an accounting pronouncement in the unusual instance that the
pronouncement does not include specified transition provisions. This
statement also requires retrospective application to prior period
financial statements of changes in accounting principles, unless it
is impractical to determine either the period specific or cumulative
effects of the accounting change. SFAS No. 154 is effective for
accounting changes made in fiscal years beginning after
December 15, 2005. The adoption of SFAS No. 154 is not expected to
have a material impact on the Corporation's consolidated financial
condition or results of operations.

     In December 2004, the FASB issued Statement of Financial
Accounting Standards ("SFAS") No. 153, "Exchanges of Nonmonetary
Assets", which amends APB Opinion No. 29, "Accounting for
Nonmonetary Transactions".  SFAS No. 153 eliminates the exception
from fair value measurement for nonmonetary exchanges of similar
productive assets in Opinion No. 29 and replaces it with an
exception for exchanges that do not have commercial substance.  SFAS
No. 153 specifies that a nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange.  SFAS No. 153 is
effective for nonmonetary exchanges occurring in fiscal periods
beginning after June 15, 2005.  The adoption of SFAS No. 153 is not
expected to have a material impact on the Corporation's consolidated
financial condition or results of operations.

     In December 2004, the FASB issued Statement of Financial
Accounting Standards ("SFAS") No. 123 (revised 2004), "Share Based
Payment".  This Statement is a revision of SFAS No. 123, "Accounting
for Stock Based Compensation", and supercedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees", and its related
guidance.  SFAS No. 123 (revised 2004) established standards for the
accounting for transactions in which an entity exchanges its equity
instruments for goods and services.  This Statement requires that
the cost resulting from all share based payment transactions be
recognized in the financial statements.  This Statement establishes
fair value as the measurement objective in accounting for share
based payment arrangements and requires all entities to apply a fair
value based measurement method in accounting for share based payment
transactions with employees, except for equity instruments held by
employee share ownership plans.

     In addition, this statement amends SFAS No. 95 "Statement of
Cash Flows" to require that excess tax benefits be reported as
financing cash inflow rather than as a reduction of taxes paid. The
Corporation has adopted these statements as of January 1, 2006.

     In January 2003, the Corporation adopted the provisions of SFAS
No. 123 and began recognizing the compensation expense ratably in
the consolidated statement of income, based on the estimated fair
value of all awards granted after that date. SFAS No. 123R will
require the Corporation to change its method of accounting for share
based awards to include estimated forfeitures in the initial
estimate of compensation expense and to accelerate the recognition
of compensation expense for retiree eligible employees. The adoption
of these standards is not expected to have a material effect on the
Corporation's consolidated financial condition or results of
operations.

ADVERTISING COSTS

     It is the Corporation's policy to expense advertising costs in
the period in which they are incurred. Advertising expense for the
nine month period ended September 30, 2006 and 2005 was
approximately $193,000 and $173,000, respectively.

RECLASSIFICATIONS

     Certain amounts in the consolidated financial statements of
prior periods have been reclassified to conform with presentation
used in the 2006 consolidated financial statements. Such
reclassifications have no effect on the Corporation's consolidated
financial condition or net income.


                                10


<PAGE>


Note 2.  ALLOWANCE FOR LOAN LOSSES

     Changes in the allowance for loan losses for the periods ended
September 30, 2006, and September 30, 2005, were as follows:

<TABLE>
<CAPTION>

(amounts in thousands)
                                                2006         2005
                                                ____         ____

                                       <c>           <c>
Balance, January 1                               $3,676        $3,828
Provision charged to operations                     460           500
Loans charged off                                  (492)         (678)
Recoveries                                           38            27
                                                               ______   ______
Balance, September 30                            $3,622        $3,677
                                                               ======   ======

</TABLE>

     At September 30, 2006, the total recorded investment in loans
that are considered to be impaired as defined by SFAS No. 114 was
$2,088,000.  These impaired loans had a related allowance for loan
losses of $143,000.  No additional charge to operations was required
to provide for the impaired loans since the total allowance for loan
losses is estimated by management to be adequate to provide for the
loan loss allowance required by SFAS No. 114 along with any other
potential losses.

     At September 30, 2006, there were no significant commitments to
lend additional funds with respect to non accrual and restructured
loans.

     Non accrual loans at September 30, 2006 and December 31, 2005
were $2,088,000 and $1,734,000, respectively, all of which were
considered impaired.

     Loans past due 90 days or more and still accruing interest
amounted to $393,00 and $64,000 on September 30, 2006 and December
31, 2005, respectively.

Note 3.  SHORT-TERM BORROWINGS

     Federal funds purchased, securities sold under agreements to
repurchase and Federal Home Loan Bank advances generally represent
overnight or less than 30 day borrowings. U.S. Treasury tax and loan
notes for collections made by the Bank are payable on demand.


Note 4.  LONG-TERM BORROWINGS

     Long term borrowings are comprised of advances from the Federal
Home Loan Bank. Under terms of a blanket agreement, collateral for
the loans are secured by certain qualifying assets of the
Corporation's banking subsidiary which consist principally of first
mortgage loans and certain investment securities.


Note 5.  FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET
         RISK AND CONCENTRATIONS OF CREDIT RISK

     The Corporation is a party to financial instruments with off
balance sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments
include commitments to extend credit and standby letters of credit.
Those instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized in the
consolidated balance sheets. The contract or notional amounts of
those instruments reflect the extent of involvement the Corporation
has in particular classes of financial instruments. The Corporation
does not engage in trading activities with respect to any of its
financial instruments with off balance sheet risk.


                                11


<PAGE>


     The Corporation's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit is
represented by the contractual notional amount of those instruments.

     The Corporation uses the same credit policies in making
commitments and conditional obligations as it does for on-balance
sheet instruments.

     The Corporation may require collateral or other security to
support financial instruments with off balance sheet credit risk.
The contract or notional amounts at September 30, 2006, and December
31, 2005, were as follows:

<TABLE>
<CAPTION>

(amounts in thousands)
                                           September 30,    December 31,
                                                2006            2005
                                                ____            ____

                                      <c>              <c>
Financial instruments whose
   contract amounts represent
   credit risk:
   Commitments to extend credit                 $33,280           $29,228
   Financial standby letters
     of credit                                    1,170             1,151
   Performance standby letters
     of credit                                    2,355             1,170

</TABLE>


     Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed
expiration dates or other termination clauses that may require
payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Corporation
evaluates each customer's creditworthiness on a case by case basis.
The amount of collateral obtained, if deemed necessary by the
Corporation upon extension of credit, is based on management's
credit evaluation of the counter party. Collateral held varies but
may include accounts receivable, inventory, property, plant and
equipment, and income producing commercial properties.

     Standby letters of credit are conditional commitments issued by
the Corporation to guarantee the performance of a customer to a
third party. The credit risk involved in issuing letters of credit
is essentially the same as that involved in extending loan
facilities to customers. The Corporation may hold collateral to
support standby letters of credit for which collateral is deemed
necessary.

     The Corporation grants commercial, agricultural, real estate
mortgage and consumer loans to customers primarily in the counties
of Columbia, Luzerne, and Montour, Pennsylvania. It is management's
opinion that the loan portfolio was well balanced and diversified at
September 30, 2006, to the extent necessary to avoid any significant
concentration of credit risk. However, its debtors ability to honor
their contracts may be influenced by the region's economy.


                                12


<PAGE>


Note 6.  STOCKHOLDERS' EQUITY

     Changes in Stockholders' Equity for the period ended September
30, 2006, were are follows:


<TABLE>
<CAPTION>

(Amounts in thousands, except common share data)

                                         Common          Common
                                         Shares         Stock       Surplus
                                         ______          ______     _______

                                  <c>             <c>          <c>
Balance at January 1, 2006                4,539,573       $9,079       $12,387

Comprehensive Income:
Net Income
Change in unrealized
  gain (loss) on
  investment securities
  available-for-sale,
  net of reclassification
  adjustment and tax effects
Total comprehensive
  income (loss)
  Purchase of 66,428
    shares of treasury stock
  Sale of 4,225 shares
    treasury stock                                                         (73)
Recognition of stock option
  expense in excess of
  forfeitures                                                                8
Cash dividends -
  $.66 per share
                                          _________        _____        ______
Balance at September 30, 2006             4,539,573        9,079        12,322
                                          =========        =====        ======


<CAPTION>

(Amounts in thousands, except common share data)

                                                               Accumulated
                                     Compre-                       Other
                                     hensive       Retained   Comprehensive
                                     Income         Earnings   Income (Loss)
                                     ______          ______      __________

                              <c>            <c>            <c>
Balance at January 1, 2006                           $35,714         $ 807

Comprehensive Income:
Net Income                             $4,528          4,528
Change in unrealized
  gain (loss) on
  investment securities
  available-for-sale,
  net of reclassification
  adjustment and tax effects             (436)                        (436)
                                       ______
Total comprehensive
  income (loss)                        $4,092
                                       ======
  Purchase of 66,428
    shares of treasury stock
  Sale of 4,225 shares
    treasury stock
Recognition of stock option
  expense in excess of
  forfeitures
Cash dividends -
  $.66 per share                                      (2,877)
                                                     _______         _____
Balance at September 30, 2006                        $37,365         $ 371
                                                     =======         =====

<CAPTION>

(Amounts in thousands, except common share data)

                                                Treasury
                                                  Stock         Total
                                                  _____         _____

                                          <c>            <c>
Balance at January 1, 2006                        $(4,544)       $53,443

Comprehensive Income:
Net Income                                                         4,528
Change in unrealized
  gain (loss) on
  investment securities
  available-for-sale,
  net of reclassification
  adjustment and tax effects                                        (436)
Total comprehensive
  income (loss)
  Purchase of 66,428
    shares of treasury stock                       (1,255)        (1,255)
  Sale of 4,225 shares
    treasury stock                                    142             69
Recognition of stock option
  expense in excess of
  forfeitures                                                          8
Cash dividends -

<PAGE>
  $.66 per share                                                  (2,877)
                                                  _______        _______
Balance at September 30, 2006                     $(5,657)       $53,480
                                                  =======        =======

</TABLE>

     On October 24, 2006 the Corporation declared a 5% stock
dividend to shareholders of record on November 14, 2006, payable on
December 5, 2006.


NOTE 7.  MANAGEMENT'S ASSERTIONS AND COMMENTS REQUIRED
         TO BE PROVIDED WITH FORM 10Q FILING

     In management's opinion, the consolidated interim financial
statements reflect fair presentation of the consolidated financial
position of First Keystone Corporation and Subsidiary, and the
results of their operations and their cash flows for the interim
periods presented.  Further, the consolidated interim financial
statements are unaudited; however they reflect all adjustments,
which are in the opinion of management, necessary to present fairly
the consolidated financial condition and consolidated results of
operations and cash flows for the interim periods presented and that
all such adjustments to the consolidated financial statements are of
a normal recurring nature.  The independent accountants, J. H.
Williams & Co., LLP, reviewed these consolidated financial
statements as stated in their accompanying review report.

     The results of operations for the nine month period ended
September 30, 2006, are not necessarily indicative of the results to
be expected for the full year.

     These consolidated interim financial statements have been
prepared in accordance with requirements of Form 10Q and therefore
do not include all disclosures normally required by generally
accepted accounting principles applicable to financial institutions
as included with consolidated financial statements included in the
Corporation's annual Form 10K filing.  The reader of these
consolidated interim financial statements may wish to refer to the
Corporation's annual report or Form 10K for the period ended
December 31, 2005, filed with the Securities and Exchange
Commission.


                                13


<PAGE>


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders of First Keystone Corporation:


We have reviewed the accompanying consolidated balance sheet of
First Keystone Corporation and Subsidiary as of September 30, 2006,
and the related consolidated statements of income for the three and
nine-month periods ended September 30, 2006 and 2005 and the
consolidated statements of cash flows for the nine month periods
ended September 30, 2006 and 2005.  These consolidated interim
financial statements are the responsibility of the management of
First Keystone Corporation and Subsidiary.

We conducted our reviews in accordance with the standards of the
Public Company Accounting Oversight Board (United States).  A review
of interim financial information consists principally of applying
analytical procedures and making inquiries of persons responsible
for financial and accounting matters.  It is substantially less in
scope than an audit conducted in accordance with the standards of
the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the
financial statements taken as a whole.  Accordingly, we do not
express such an opinion.

Based on our reviews, we are not aware of any material modifications
that should be made to the consolidated interim financial statements
referred to above for them to be in conformity with accounting
principles generally accepted in the United States of America.

We have previously audited, in accordance with the auditing
standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheet of First Keystone
Corporation and Subsidiary as of December 31, 2005, and the related
consolidated statements of income, changes in stockholders' equity,
and cash flows for the year then ended (not presented herein); and
in our report dated January 20, 2006, we expressed an unqualified
opinion on those consolidated financial statements.  In our opinion,
the information set forth in the accompanying consolidated balance
sheet as of December 31, 2005, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which
it has been derived.




/s/ J. H. Williams & Co., LLP
J. H. Williams & Co., LLP



Kingston, Pennsylvania
October 19, 2006


                                14


<PAGE>


Item 2.   First Keystone Corporation Management's Discussion
          and Analysis of Financial Condition and
          Results of Operation as of September 30, 2006


     This quarterly report contains certain forward looking
statements (as defined in the Private Securities Litigation Reform
Act of 1995), which reflect management's beliefs and expectations
based on information currently available. These forward looking
statements are inherently subject to significant risks and
uncertainties, including changes in general economic and financial
market conditions, the Corporation's ability to effectively carry
out its business plans and changes in regulatory or legislative
requirements. Other factors that could cause or contribute to such
differences are changes in competitive conditions, and pending or
threatened litigation. Although management believes the expectations
reflected in such forward looking statements are reasonable, actual
results may differ materially.


RESULTS OF OPERATIONS

     First Keystone Corporation realized earnings for the third
quarter of 2006 of $1,503,000, a decrease of $301,000 or 16.7% from
the third quarter of 2005.  Nine months net income for the period
ended September 30, 2006, amounted to $4,528,000, a decrease of
13.9% from the $5,256,000 net income reported September 30, 2005.
Net interest income declined in both the third quarter of 2006 and
for the first nine months of 2006.  The lower net interest income
was due to a flatten yield curve and continued compression in our
net interest margin.  The reduced net interest income was partially
offset by a lower loan loss provision, increased non interest
income, and continued excellent control over non interest expense.
On a per share basis, net income per share was $1.04 for the nine
months of 2006, as compared to $1.20 for the first nine months of
2005, while dividends increased to $.66 per share up from $.60 in
2005, or an increase of 10.0%.

     Year to date net income annualized amounts to a return on
average common equity of 11.54% and a return on assets of 1.16%.
For the nine months ended September 30, 2005, these measures were
12.95% and 1.39%, respectively on an annualized basis.


NET INTEREST INCOME

     The major source of operating income for the Corporation is net
interest income, defined as interest income less interest expense.
In the third quarter of 2006, interest income amounted to
$7,236,000, an increase of $599,000 or 9.0% from the third quarter
of 2005.  Interest expense amounted to $3,910,000 in the third
quarter of 2006, an increase of $929,000 or 31.2% over the third
quarter of 2005.  Accordingly, net interest income amounted to
$3,326,000 in the third quarter of 2006, a decrease of $330,000, or
9.0% from the third quarter of 2005.  Year to date for the nine
months ended September 30, 2006, total interest income increased
$1,576,000, or 8.1% to $21,145,000 from $19,569,000 in the first
nine months of 2005.  Total interest expense increased $2,486,000,
or 29.6% to $10,879,000 for the first nine months of 2006 from
$8,393,000 in the first nine months of 2005.  This resulted in net
interest income decreasing $910,000 to $10,266,000 as of September
30, 2006 from $11,176,000 as of September 30, 2005.

     Our net interest margin for the quarter ended September 30,
2006, was 3.08% compared to 3.46% for the quarter ended September
30, 2005.  For the nine months ended September 30, 2006, our net
interest margin was 3.17% compared to 3.49% for the first nine
months of 2005.


                                15


<PAGE>


PROVISION FOR LOAN LOSSES

     The provision for loan losses for the quarter ended September
30, 2006, was $100,000 compared to $150,000 for the third quarter of
2005.  Year to date, the provision for loan losses amounts to
$400,000 in 2006 as compared to the $500,000 provision for the
period ended September 30, 2005.  Net charge offs amounted to
$454,000 for the nine months ended September 30, 2006, as compared
to $651,000 for the first nine months of 2005.

     The allowance for loan losses as a percentage of loans, net of
unearned interest was 1.44% as of September 30, 2006, and 1.57% as
of December 31, 2005.


NON-INTEREST INCOME

     Total non interest or other income was $952,000 for the quarter
ended September 30, 2006, as compared to $915,000 for the quarter
ended September 30, 2005.  Excluding investment security gains and
losses, non interest income was $878,000 for the third quarter of
2006, as compared to $826,000 in the third quarter of 2005, an
increase of 6.3%.  For the nine months ended September 30, 2006,
total non interest income was $2,720,000, as compared to $2,634,000,
or a 3.3% increase from the first nine months of 2005.  In both the
third quarter of 2006 and for the nine months ended September 30,
2006, the increase in non interest income was primarily the result
of an increase in trust department revenue, an increase in bank
owned life insurance income, and an increase in other non interest
income.


NON-INTEREST EXPENSES

     Total non interest, or other expenses, was $2,380,000 for the
quarter ended September 30, 2006, as compared to $2,245,000 for the
quarter ended September 30, 2005, an increase of $135,000 or 6.0%.

     For the nine months ended September 30, 2006, total non
interest expense was $7,235,000, an increase of $270,000, or 3.9%
over the first nine months of 2005.  Expenses associated with
employees (salaries and employee benefits) continue to be the
largest category of non interest expenses.  Salaries and benefits
amount to 54.7% of total non interest expense for the nine months
ended September 30, 2006, as compared to 52.7% for the first nine
months of 2005.  Salaries and benefits amounted to $3,955,000 for
the nine months ended September 30, 2006, an increase of $286,000,
or 7.8% over the first nine months of 2005.  Net occupancy expense,
along with furniture and equipment expense, increased for the nine
months ended September 30, 2006, from 2005.  Professional services
expense declined slightly in 2006.  Other non interest expense
decreased moderately in 2006 and state shares tax has increased
slightly.  Our overall non interest expense continues at less than
2% of average assets on an annualized basis.  This places us among
the leaders of our peer financial institutions at controlling non
interest expense.


INCOME TAXES

     Effective tax planning has helped produce favorable net income.
The effective total income tax rate was 16.4% for the third quarter
of 2006 as compared to 17.1% for the third quarter of 2005.  For the
nine months ended September 30, 2006, our tax liability amounted to
$823,000 for an effective tax rate of 15.4% as compared to an
effective tax rate of 17.2% for the first nine months of 2005.  The
decrease in our effective tax rate was due primarily to the tax
savings derived from our investment in bank owned life insurance and
additional investment in municipal securities.


                                16


<PAGE>


ANALYSIS OF FINANCIAL CONDITION

ASSETS

     Total assets increased to $521,665,000 as of September 30,
2006, an increase of $9,266,000, or 1.8% over year end 2005.  Total
deposits increased to $386,370,000 as of September 30, 2006, an
increase of $23,574,000, or 6.5% over year end 2005.

     The Corporation used the increase in total deposits to fund
primarily an increase in loans and reduced borrowings.  Borrowings
decreased $14,640,000 from December 31, 2005.  Short term borrowings
decreased to $18,511,000 as of September 30, 2006, down $9,640,000
from year end 2005.  Long term borrowings decreased to $60,535,000
as of September 30, 2006, down $5,000,000 from year end 2005.


EARNING ASSETS

     Our primary earning asset, loans, net of unearned income
increased to $251,257,000 as of September 30, 2006, an increase of
$16,664,000, or 7.1% from year end 2005.  The loan portfolio is well
diversified and the increases in the portfolio has been primarily
from increased originations of commercial real estate loans.

     In addition to loans, another primary earning asset is our
investment portfolio which has decreased in size from December 31,
2005, to September 30, 2006.  Available for sale securities amounted
to $236,428,000 as of September 30, 2006, a decrease of $10,860,000,
or 4.4% from year end 2005.  However, held to maturity securities
increased to $6,932,000 as of September 30, 2006, an increase of
$2,684,000, or 63.2% since year end 2005.  Interest bearing deposits
with banks increased to $83,000 on September 30, 2006, as compared
to $58,000 as of December 31, 2005.


ALLOWANCE FOR LOAN LOSSES

     Management performs a quarterly analysis to determine the
adequacy of the allowance for loan losses.  The methodology in
determining adequacy incorporates specific allocations together with
a risk/loss analysis on various segments of the portfolio according
to an internal loan review process.  Management maintains its loan
review and loan classification standards consistent with those of
its regulatory supervisory authority.  Management feels, considering
the conservative portfolio composition, which is largely composed of
small retail loans (mortgages and installments) with minimal
classified assets, low delinquencies, and favorable loss history,
that the allowance for loan loss is adequate to cover foreseeable
future losses.

     Any loans classified for regulatory purposes as loss, doubtful,
substandard, or special mention that have not been disclosed under
Industry Guide 3 do not (i) represent or result from trends or
uncertainties which management reasonably expects will materially
impact future operating results, liquidity, or capital resources, or
(ii) represent material credits about which management is aware of
any information which causes management to have serious doubts as to
the ability of such borrowers to comply with the loan repayment
terms.

     The company was required to adopt Financial Accounting
Standards Board Statement No. 114, "Accounting by Creditors for
Impairment of a Loan" - Refer to Note 5 above for details.


                                17


<PAGE>


NON-PERFORMING ASSETS

     Non performing assets consist of non accrual and restructured
loans, other real estate and foreclosed assets, together with the
loans past due 90 days or more and still accruing.  As of September
30, 2006, total non performing assets were $2,675,000 as compared to
$2,530,000 on December 31, 2005.  Non performing assets to total
loans and foreclosed assets was 1.07% as of September 30, 2006, and
1.08% as of December 31, 2005.

     Interest income received on non performing loans as of
September 30, 2006, was $8,000 compared to $57,000 as of December
31, 2005.  Interest income, which would have been recorded on these
loans under the original terms as of September 30, 2006, and
December 31, 2005, was $130,000 and $149,000, respectively.  As of
September 30, 2006 and December 31, 2005, there was no outstanding
commitments to advance additional funds with respect to these non
performing loans.

DEPOSITS AND OTHER BORROWED FUNDS

     As indicated previously, total deposits increased by
$23,574,000 as non interest bearing deposits decreased by $820,000
and interest bearing deposits increased by $24,394,000 as of
September 30, 2006, from year end 2005.  Total short term and long
term borrowings decreased by $14,640,000 from year end 2005.


CAPITAL STRENGTH

     Normal increases in capital are generated by net income, less
cash dividends paid out.  Also, accumulated other comprehensive
income derived from unrealized gains on investment securities
available for sale increased shareholders' equity, or capital net of
taxes, by $371,000 as of September 30, 2006, and $807,000 as of
December 31, 2005.  Our stock repurchase plan repurchased 215,827
shares as treasury stock as of September 30, 2006 and 153,624 shares
as treasury stock as of December 31, 2005.  This had an effect of
our reducing our total stockholders' equity by $5,657,000 on
September 30, 2006, and $4,544,000 as of December 31, 2005.

     Total stockholders' equity was $53,480,000 as of September 30,
2006, and $53,443,000 as of December 31, 2005.  Leverage ratio and
risk based capital ratios remain very strong.  As of September 30,
2006, our leverage ratio was 10.00% compared to 10.04% as of
December 31, 2005.  In addition, Tier I risk based capital and total
risk based capital ratio as of September 30, 2006, were 17.48% and
18.83%, respectively.  The same ratios as of December 31, 2005, were
17.74% and 19.16%, respectively.


LIQUIDITY

     The liquidity position of the Corporation remains adequate to
meet customer loan demand and deposit fluctuation.  Managing
liquidity remains an important segment of asset liability
management.  Our overall liquidity position is maintained by an
active asset liability management committee.

     Management feels its current liquidity position is
satisfactorily given a very stable core deposit base which has
increased annually.  Secondly, our loan payments and principal
paydowns on our mortgage backed securities provide a steady source
of funds.  Also, short term investments and maturing investment
securities represent additional sources of liquidity.  Finally,
short term borrowings are readily accessible at the Federal Reserve
Bank discount window, Atlantic Central Bankers Bank, or the Federal
Home Loan Bank.


                                18


<PAGE>


ITEM 3.   Quantitative and Qualitative Disclosures
          About Market Risk

     There have been no material changes in the Company's
quantitative and qualitative market risks since December 31, 2005.
The composition of rate sensitive assets and rate sensitive
liabilities as of September 30, 2006 is very similar to December 31,
2005.


ITEM 4.   Controls and Procedures

     a)   Evaluation of disclosure controls and procedures.  The
company maintains controls and procedures designed to ensure that
information required to be disclosed in the reports that the company
files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the Securities and Exchange
Commission.  Based upon their evaluation of those controls and
procedures performed within 90 days of the filing date of this
report, the chief executive and chief financial officers of the
company concluded that the company's disclosure controls and
procedures were adequate.

     b)   Changes in internal controls.  The Company made no
significant changes in its internal controls or in other factors
that could significantly affect these controls subsequent to the
date of the evaluation of the controls by the Chief Executive and
Chief Financial officers.


                                19


<PAGE>


                     PART II - OTHER INFORMATION

Item 1.   Legal Proceedings

          None.


Item 2.   Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities

<TABLE>
<CAPTION>
                                                Total
                                                 Number         Maximum
                                              of Shares        Number of
                                              Purchased       Shares That
                                               as Part of       May Yet Be
                    Total                       Publicly        Purchased
                     Number      Average       Announced        Under the
                  of Shares      Price Paid     Plans or        Plans or
     Period       Purchased     per Share       Programs        Programs
     ______       _________     _________       ________        ________

               <c>           <c>           <c>            <c>
July 1 -
July 31,
2006                            --            --             --         67,001

August 1 -
August 31,
2006                            45,000        18.50          45,000     22,001

September 1 -
September 30,
2006                            --            --             --         22,001

Total             45,000        18.50         45,000         22,001


</TABLE>


Item 3.   Defaults Upon Senior Securities

          None.


Item 4.   Submission of Matters to a Vote of Security Holders

          Annual Meeting of Shareholders of First Keystone
          Corporation held on Tuesday, April 18, 2006 at 10:00 a.m.

<TABLE>
<CAPTION>
                                                     Votes        Votes
Directors Elected                   Votes For       Against      Withheld
_________________                   _________        ______      _______

                             <c>              <c>             <c>
Budd L. Beyer                   3,086,287        42,145          0
Frederick E. Crispin, Jr.       3,087,349        41,073          0
Jerome F. Fabian                3,088,009        40,413          0
Robert J. Wise                  3,011,164        117,258         0


<CAPTION>
                                                 Broker
Directors Elected               Abstentions      Non-Votes
_________________               ___________      _________

                             <c>              <c>
Budd L. Beyer                   0                0
Frederick E. Crispin, Jr.       0                0
Jerome F. Fabian                0                0
Robert J. Wise                  0                0

</TABLE>


                                20


<PAGE>


Directors Continuing:
____________________

John E. Arndt, term expires in 2007
J. Gerald Bazewicz, term expires in 2007
Robert E. Bull, term expires in 2007
Don E. Bower, term expires in 2008
John L. Coates, term expires in 2008
Dudley P. Cooley, term expires in 2008


Matters Voted Upon:
__________________

Selection of J. H. Williams & Co. LLP, as auditors for the
Corporation.

Votes For - 3,126,328
Votes Against - 2,034
Votes Withheld -  0
Abstentions - 60
Broker Non-Votes -  0


Item 5.   Other Information

          The Company made no material changes to the procedures by
          which shareholders may recommend nominees to the Company's
          Board of Directors.


                                21


<PAGE>


Item 6.   Exhibits and Reports on Form 8-K

          (a)  Exhibits required by Item 601 Regulation S-K


Exhibit Number        Description of Exhibit

3i                    Articles of Incorporation, as amended
                      (Incorporated by reference to Exhibit 3(i) to
                      the Registrant's Report on Form 10Q for the
                      quarter ended March 31, 2006).

3ii                   By-Laws, as amended (Incorporated by
                      reference to Exhibit 3(ii) to the
                      Registrant's Report on Form 10Q for the
                      quarter ended March 31, 2006).

10.1               Supplemental Employee Retirement Plan
                       (Incorporated by reference to Exhibit 10 to
                       Registrant's Report on Form 10Q for the
                       quarter ended September 30, 2005).

10.2               Management Incentive Compensation Plan

10.3               Profit Sharing Plan

10.4               First Keystone Corporation 1998 Stock
                       Incentive Plan

14                  Code of Ethics (Incorporated by reference to
                      Exhibit 14 to the Registrant's Annual Report
                      on 10K for the year ended December 31, 2003).

31.1               Rule 13a-14(a)/15d-14(a) Certification of
                       Chief Executive Officer.

31.2               Rule 13a-14(a)/15d-14(a) Certification of
                       Chief Financial Officer.

32.1               Section 1350 Certification of Chief Executive
                       Officer.

32.2                Section 1350 Certification of Chief Financial
                        Officer.


    (b)  During the quarter ended September 30, 2006, the
registrant filed the following reports on Form 8-K:

Date of Report     Item     Description
______________     ____     ___________

July 28, 2006      5        On July 27, 2006, the Registrant issued
                            a press release announcing its earnings
                            for the quarter ended September 30,
                            2006.

August 30, 2006    5        On August 28, 2006, the Registrant
                            issued a press release announcing the
                            declaration of it's third quarter
                            dividend.


                                22


<PAGE>


                      FIRST KEYSTONE CORPORATION

                              SIGNATURES


     Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly cause this report to be signed on its
behalf by the undersigned, thereunto duly authorized.


                             FIRST KEYSTONE CORPORATION
                             Registrant


November 7, 2006             /s/ J. Gerald Bazewicz
                             J. Gerald Bazewicz
                             President and
                             Chief Executive Officer
                             (Principal Executive Officer)



November 7, 2006             /s/ Diane C.A. Rosler
                             Diane C.A. Rosler
                             Principal Financial Officer
                             (Principal Accounting Officer)


                                23


<PAGE>


                          INDEX TO EXHIBITS

Exhibit            Description
_______            ___________

3i                 Articles of Incorporation, as amended
                   (Incorporated by reference to Exhibit 3(i) to
                   the Registrant's Report on Form 10Q for the
                   quarter ended March 31, 2006).

3i                 By-Laws, as amended (Incorporated by reference
                   to Exhibit 3(ii) to the Registrant's Report on
                   Form 10Q for the quarter ended March 31, 2006).

10.1               Supplemental Employee Retirement Plan
                   (Incorporated by reference to Exhibit 10 to
                   Registrant's Report on Form 10Q for the quarter
                   ended September 30, 2005).

10.2               Management Incentive Compensation Plan

10.3               Profit Sharing Plan

10.4               First Keystone Corporation 1998 Stock Incentive
                   Plan

14                 Code of Ethics (Incorporated by reference to
                   Exhibit 14 to the Registrant's Annual Report on
                   10K for the year ended December 31, 2003).

31.1               Rule 13a-14(a)/15d-14(a) Certification of Chief
                   Executive Officer.

31.2               Rule 13a-14(a)/15d-14(a) Certification of Chief
                   Financial Officer.

32.1               Section 1350 Certification of Chief Executive
                   Officer.

32.2               Section 1350 Certification of Chief Financial
                   Officer.


                                24